Phunware, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. References in this section to “we,” “us,” "our" or “the Company” refer to Phunware, Inc. References to “management” or “management team” refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed in the section titled “ Risk Factors ” and elsewhere in this Annual Report. Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding. Key Events and Recent Developments On September 10, 2021, we entered into a Stock Purchase Agreement with Caleb Borgstrom for the purchase of all issued and outstanding shares of common stock of Lyte Technology, Inc. with an initial purchase price of up to approximately $10.3 million, of which $2.5 million is subject to an earnout provision based upon Lyte operations meeting certain annual revenue milestones. On October 18, 2021, we closed the acquisition with an adjusted purchase price of approximately $11.0 million (subject to the earn-out adjustment), representing an increase in working capital as of the closing date. Refer to Note 3 " Business Combination " in the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information on the acquisition of Lyte. Refer to " Liquidity and Ca pital Resources " below for further discussion on key events and recent developments. Overview Phunware, Inc. offers a fully integrated software platform that equips companies with the products, solutions and services necessary to engage, manage and monetize their mobile application portfolios globally at scale. Our MaaS platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship. Our offerings include: • Enterprise mobile software development kits (SDKs) including content management, location-based services, marketing automation, business intelligence and analytics, alerts, notifications and messaging, audience engagement and audience monetization; • Integration of our SDK licenses into existing applications maintained by our customers, as well as custom application development and support services; • Cloud-based vertical solutions, which are off-the-shelf, iOS- and Android-based mobile application portfolios, solutions and services that address: the patient experience for healthcare, the shopper experience for retail, the fan experience for sports, the traveler experience for aviation, the luxury resident experience for real estate, the luxury guest experience for hospitality, the student experience for education and the generic user experience for all other verticals and applications; and • Application transactions for mobile audience building, user acquisition, application discovery, audience engagement and monetization, including our engagement-driven cryptocurrency PhunToken. We also offer and sell pre-packaged and custom high-end personal computer systems for gaming, streaming and cryptocurrency mining enthusiasts. We intend to continue investing for long-term growth. We have invested and expect to continue investing in the expansion of our ability to market, sell and provide our current and future products and services to customers globally. We also expect to continue investing in the development and improvement of new and existing products and services to address customers' needs. We currently do not expect to be profitable in the near future. 49 Table of Contents Key Business Metrics Our management regularly monitors certain financial measures to track the progress of its business against internal goals and targets. We believe that the most important of these measures include backlog and deferred revenue. Backlog and Deferred Revenue. Backlog represents future amounts to be invoiced under our current software subscription and services customer agreements. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenue, deferred revenue, accounts receivable or elsewhere in our consolidated financial statements, and are considered by us to be backlog. We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing and duration of customer renewals. We reasonably expect approximately 40% of our backlog as of December 31, 2021 will be invoiced during the subsequent 12-month period, primarily due to the fact that our contracts are typically one to three years in length. In addition, our deferred revenue consists of amounts that have been invoiced but have not yet been recognized as revenues as of the end of a reporting period. Together, the sum of deferred revenue and backlog represents the total billed and unbilled contract value yet to be recognized in revenue, and provides visibility into future revenue streams. The following table sets forth our backlog and deferred revenue: December 31, 2021 2020 (in thousands) Backlog $ 3,316 $ 3,991 Deferred revenue 5,272 5,075 Total backlog and deferred revenue $ 8,588 $ 9,066 For further information regarding our deferred revenue balances, refer to Note 4 “ Revenue ” of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. 50 Table of Contents Non-GAAP Financial Measures Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA We report our financial results in accordance with GAAP. We also use certain non-GAAP financial measures that fall within the meaning ascribed in SEC Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior period results. Our non-GAAP financial measures include adjusted gross profit, adjusted gross margin and adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") (our "non-GAAP financial measures"). Management uses these measures (i) to compare operating performance on a consistent basis, (ii) to calculate incentive compensation for our employees, (iii) for planning purposes including the preparation of our internal annual operating budget and (iv) to evaluate the performance and effectiveness of operational strategies. Our non-GAAP financial measures should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue or net loss, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Our non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include: • Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; • Our non-GAAP financial measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and • Other companies in our industry may calculate our non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures. We compensate for these limitations to our non-GAAP financial measures by relying primarily on our GAAP results and using our non-GAAP financial measures only for supplemental purposes. Our non-GAAP financial measures include adjustments for items that may not occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other peer companies over time. For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards. We may also exclude certain discrete, unusual, one-time, or non-cash costs in order to facilitate a more useful period-over-period comparison of our financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses. The following table sets forth the non-GAAP financial measures we monitor. Year Ended December 31, 2021 2020 (in thousands, except percentages) Adjusted gross profit (1) $ 4,670 $ 6,939 Adjusted gross margin (1) 43.9 % 69.4 % Adjusted EBITDA (2) $ (11,662) $ (8,353) (1) Adjusted gross profit and adjusted gross margin are non-GAAP financial measures. We believe that adjusted gross profit and adjusted gross margin provide supplemental information with respect to gross profit and gross margin regarding ongoing performance. We define adjusted gross profit as net revenues less cost of revenue, adjusted to exclude one-time revenue adjustments, stock-based compensation and amortization of intangible assets. We define adjusted gross margin as adjusted gross profit as a percentage of net revenues. 51 Table of Contents (2) Adjusted EBITDA is a non-GAAP financial measure. We believe adjusted EBITDA provides helpful information with respect to operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of day-to-day operations. We define adjusted EBITDA as net loss plus (i) interest expense, (ii) income tax expense, (iii) depreciation, (iv) amortization, and further adjusted for (v) one-time adjustments and (vi) stock-based compensation expense. Reconciliation of Non-GAAP Financial Measures The following tables set forth a reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above. Year Ended December 31, 2021 2020 (in thousands, except percentages) Gross profit $ 3,613 $ 6,644 Add back: Amortization of intangibles 7 21 Add back: Stock-based compensation 1,050 274 Adjusted gross profit $ 4,670 $ 6,939 Adjusted gross margin 43.9 % 69.4 % Year Ended December 31, 2021 2020 (in thousands) Net loss $ (53,522) $ (22,199) Add back: Depreciation and amortization 240 153 Add back: Interest expense 4,481 3,413 (Less) Add back: Income tax (benefit) expense (426) 2 EBITDA (49,227) (18,631) Add back: Stock-based compensation 4,941 4,492 Add back: Legal settlement — 4,500 Add back: Loss on extinguishment of debt 7,952 2,158 Add back: Impairment of digital assets 9,383 — Add back (Less): Fair value adjustment for warrant liabilities 18,139 (872) Less: Gain on forgiveness of PPP loan (2,850) — Adjusted EBITDA $ (11,662) $ (8,353) 52 Table of Contents Components of Results of Operations Revenue and Gross Profit There are a number of factors that impact the revenue and margin profile of the product, service and technology offerings we provide, including, but not limited to, solution and technology complexity, technical expertise requiring the combination of products and types of services provided, as well as other elements that may be specific to a particular client solution. Platform Subscriptions and Services Revenue. Subscription revenue is derived from software license fees, which comprise subscription fees from customers licensing our Software Development Kits (SDKs), that includes accessing the MaaS platform; application development service revenue from the development of customer applications, or apps, which are built and delivered to customers; and support fees. Subscription revenue from SDK licenses gives the customer the right to access our MaaS platform. Application development revenue is derived from development services around designing and building new applications or enhancing existing applications. Support revenue is comprised of support and maintenance fees of customer applications, software updates and technical support for application development services for a support term. From time to time, we also provide professional services by outsourcing employees’ time and materials to customers. Platform subscriptions and services gross profit is equal to subscriptions and services revenue less the cost of personnel and related costs for our support and professional services employees, external consultants, stock-based compensation and allocated overhead. Costs associated with our development and project management teams are generally recognized as incurred. Costs directly attributable to the development or support of applications relating to platform subscription customers are included in cost of sales, whereas costs related to the ongoing development and maintenance of Phunware’s MaaS platform are expensed in research and development. As a result, platform subscriptions and services gross profit may fluctuate from period to period. Application Transaction Revenue. We also generate revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Fees from advertisers are commonly based on the number of ads delivered or views, clicks or actions by users on mobile advertisements delivered, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell ads through several offerings: cost per thousand impressions and cost per click. During 2021, we announced the commencement of the selling of PhunToken, PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest. We recognize revenue related to PhunToken at time of delivery to a customer's ethereum-based wallet. Application transaction gross profit is equal to application transaction revenue less cost of revenue associated with application transactions. Application transaction gross profit is impacted by the cost of advertising traffic we pay to our suppliers, the amount of traffic which we can purchase from those suppliers and ethereum blockchain fees paid to deliver PhunToken. As a result, our application transaction gross profit may fluctuate from period to period due to variable costs of advertising traffic and cryptocurrency blockchain fees. Computer Hardware Revenue . We acquired Lyte in October 2021. Revenue from Lyte is primarily derived from the sale of high-performance personal computers. Lyte computers are sold with a variety of pre-packaged solutions, as well as customizable solutions selected by our customers. A majority of Lyte's customers pay us via credit card payments, which is managed through a third party processor. We recognize revenue at the time a completed unit ships from our facility. Computer hardware gross profit is equal to computer hardware revenue less the costs associated with the assembly of computers. Computer hardware gross profit is impacted by the costs that we pay for parts incorporated into a Lyte computer system, as well as labor costs of our employees directly attributable to building computer systems and shipping. Demand may exceed available supply at times, which may hamper our ability to deliver computer systems timely and may increase the costs at which we can obtain inventory needed for computer builds. Customizable solutions we offer our customers may also vary from time to time. As a result, computer hardware revenue and gross profit may fluctuate from period to period. Although we plan to invest in Lyte for future growth, we may experience revenue and gross profit fluctuations as a result of seasonality. 53 Table of Contents Gross Margin Gross margin measures gross profit as a percentage of revenue. Gross margin is generally impacted by the same factors that affect changes in the mix of subscriptions and services and application transactions, and computer hardware. Operating Expenses Our operating expenses include sales and marketing expenses, general and administrative expenses, research and development expenses, depreciation and amortization of acquired intangible assets. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, commissions. Legal settlements pertaining to litigation brought as a result of the Company's operations is also included in operating expenses. Sales and Marketing Expense. Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay and benefits related to sales personnel, along with travel expenses, other employee related costs, including stock-based compensation and expenses related to marketing programs and promotional activities. We expect our sales and marketing expense will increase in absolute dollars as we increase our sales and marketing organizations as we plan to increase revenue but may fluctuate as a percentage of our total revenue from period to period. General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of administrative personnel, including variable incentive pay and stock-based compensation, bad debt expenses and other administrative costs such as facilities expenses, professional fees and travel expenses. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards of Nasdaq, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period. Research and Development Expense. Research and development expenses consist primarily of employee compensation costs and overhead allocation. We believe that continued investment in our platform is important for our growth. As a result, we expect our research and development expenses will increase in absolute dollars as our business grows but may fluctuate as a percentage of revenue from period to period. Interest Expense Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs. Refer to Note 8 " Factoring Agreement " and Note 9 " Debt " of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information on our factoring arrangement and debt offerings, respectively. We also may seek additional debt financings to fund the expansion of our business or to finance strategic acquisitions in the future, which may have an impact on our interest expense. Income Tax Expense We are subject to U.S. Federal income taxes, state income taxes net of federal income tax effect and nondeductible expenses. Our effective tax rate will vary depending on permanent non-deductible expenses and other factors. Refer to Note 15 " Income Taxes " of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion. 54 Table of Contents Results of Operations Comparison of Fiscal Years Ended December 31, 2021 and 2020 Net Revenue Year Ended December 31, Change (in thousands, except percentages) 2021 2020 Amount % Net Revenue Platform subscriptions and services $ 5,308 $ 9,108 $ (3,800) (41.7) % Computer hardware 3,095 — 3,095 100.0 % Application transaction 2,240 893 1,347 150.8 % Total revenue $ 10,643 $ 10,001 $ 642 6.4 % Platform subscriptions and services as a percentage of total revenue 49.9 % 91.1 % Computer hardware as a percentage of total revenue 29.1 % — % Application transactions as a percentage of total revenue 21.0 % 8.9 % Total revenue increased $0.6 million, or 6.4%, in the year ended December 31, 2021 compared to the corresponding period in 2020. Platform subscriptions and services revenue decreased $3.8 million, or (41.7)%. Greater revenues derived in 2020 were primarily driven by development, licensing and support services provided to a particular customer during 2020. Revenue from this customer was 32% of our total net revenues for the year ended December 31, 2020. This customer is identified as “ Customer D ” in Note 4 “ Revenue ” of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Computer hardware revenue represented $3.1 million due to the Lyte Technology, Inc. acquisition. Application transaction revenue increased $1.3 million, or 150.8% due to $1.1 million in PhunToken sales, as we commenced the sale of PhunToken in 2021 and an increase in revenue related to advertising campaigns. 55 Table of Contents Cost of Revenue, Gross Profit and Gross Margin Year Ended December 31, Change (in thousands, except percentages) 2021 2020 Amount % Cost of Revenue Platform subscriptions and services $ 3,702 $ 3,180 $ 522 16.4 % Computer hardware 3,017 — 3,017 100.0 % Application transaction 311 177 134 75.7 % Total cost of revenue $ 7,030 $ 3,357 $ 3,673 109.4 % Gross Profit Platform subscriptions and services $ 1,606 $ 5,928 $ (4,322) (72.9) % Computer hardware 78 — 78 100.0 % Application transaction 1,929 716 1,213 169.4 % Total gross profit $ 3,613 $ 6,644 $ (3,031) (45.6) % Gross Margin Platform subscriptions and services 30.3 % 65.1 % Computer hardware 2.5 % — % Application transaction 86.1 % 80.2 % Total gross margin 33.9 % 66.4 % Total gross profit decreased $3.0 million, or (45.6)%, in the year ended December 31, 2021 compared to the corresponding period of 2020. Stock-based compensation increased $0.8 million during the year ended December 31, 2021. Furthermore, margin decrease can be attributed to a higher margin realized in 2020 as compared to the same period in 2021 related to the customer identified as “ Customer D ” in Note 4, “ Revenue ”, in the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Operating Expenses Year Ended December 31, Change (in thousands, except percentages) 2021 2020 Amount % Operating expenses Sales and marketing $ 3,022 $ 1,653 $ 1,369 82.8 % General and administrative 13,256 15,361 (2,105) (13.7) % Research and development 4,179 2,628 1,551 59.0 % Legal settlement — 4,500 (4,500) (100.0) % Total operating expenses $ 20,457 $ 24,142 $ (3,685) (15.3) % Sales and Marketing Sales and marketing expense increased $1.4 million, or 82.8% for the year ended December 31, 2021 compared to the corresponding period of 2020, primarily due to $0.5 million of increase employee compensation costs due to higher headcount, $0.4 million related to stock-based compensation expense and $0.3 million of online marketing expenditures. General and Administrative General and administrative expense decreased $2.1 million, or (13.7)%, for the year ended December 31, 2021, compared to the corresponding period of 2020, primarily due to a decrease of $1.8 million in legal fees mainly related to our previous litigation with Uber, $1.3 million in stock-based compensation expense and $0.5 million in bad debt recoveries. This decrease was partially offset by additional expenses of $1.2 million related to investor relations costs. 56 Table of Contents Research and Development Research and development expense increased $1.6 million, or 59.0% for the year ended December 31, 2021, compared to the corresponding period of 2020, primarily due to increases of $1.0 million for increased headcount dedicated to research and development projects and $0.6 million in stock-based compensation expense. Legal Settlement The legal settlement expense of $4.5 million for the year ended December 31, 2020 relates to the settlement of our litigation with Uber as described in detail in Note 11 " Commitments and Contingencies " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Other income (expense) Year Ended December 31, Change (in thousands, except percentages) 2021 2020 Amount % Other income (expense) Interest expense $ (4,481) $ (3,413) $ (1,068) 31.3 % Loss on extinguishment of debt (7,952) (2,158) (5,794) 268.5 % Impairment of digital assets (9,383) — (9,383) 100.0 % Fair value adjustment for warrant liabilities (18,139) 872 (19,011) (2,180.2) % Gain on forgiveness of Paycheck Protection Program ("PPP") loan 2,850 — 2,850 100.0 % Other income, net 1 — 1 100.0 % Total other expense $ (37,104) $ (4,699) $ (32,405) 689.6 % Other expense increased $(32.4) million for the year ended December 31, 2021 when compared to 2020, primarily due to a fair value adjustment as a result of a partial exercise of an outstanding warrant issued to the holder of our 2020 Convertible Notes, impairment of our digital asset holdings, primarily consisting of bitcoin and losses on extinguishment of debt related to payments and the payoff of our 2020 Convertible Notes. These losses were partially offset by the gain on forgiveness of our Paycheck Protection Program loan. Refer to Note 2, " Summary of Significant Accounting Policies " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion regarding our digital asset holdings. Further, reference is made to Note 9 " Debt " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our debt holdings. 57 Table of Contents Liquidity and Capital Resources As of December 31, 2021, we held total cash of $23.1 million, all of which was held in the United States. In connection with our acquisition of Lyte, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (the "2021 Promissory Note") with an original principal amount of $5.2 million in a private placement that closed on October 18, 2021. After deducting all transaction cost, net cash proceeds to us were $4.7 million. No interest will accrue on the promissory note unless and until the occurrence of an event of default (as defined in the promissory note). We may prepay outstanding balance of the promissory note earlier than it is due with a prepayment premium of 110%. Beginning on January 15, 2022 and on the same day of each month thereafter until the promissory note is paid in full, we are required to make a monthly amortization payments in the amount of $574 thousand which are considered prepayments subject to the prepayment premium. On April 7, 2021, we entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc. ("B. Riley"), pursuant to which we offered and sold shares of our common stock, from time to time. We filed two prospectus supplements on April 7, 2021 and October 26, 2021 that form part of our shelf registration statement for the offer and sale of up to an aggregate of $25 million and $48.5 million in common stock, respectively. As of December 31, 2021, 20,951,043 shares of our common stock had been sold and we had received aggregate net cash proceeds of $65.2 million. We terminated our At Market Issuance Sales Agreement with B. Riley on February 4, 2022, with an effective termination date of February 9, 2022. In addition, on October 22, 2021, the holder of our 2020 Convertible Notes partially exercised its warrant for the purchase of 2,060,000 shares of our common stock at an exercise price of $2.25 per share for net proceeds of $4.6 million to the Company. On February 1, 2022, we filed a Form S-3, which was subsequently declared effective by the SEC on February 9, 2022, pursuant to which we may issue up to $200 million in common stock, preferred stock, warrants and units. Contained therein, was a prospectus supplement in which we may sell up to $100 million of our common stock in an “at the market offering” as defined by the Securities Act pursuant to an At Market Issuance Sales Agreement we entered into with H.C. Wainwright & Co., LLC on January 31, 2022. To date, we have not sold any shares of our common stock under the sales agreement with H.C. Wainwright or issued any securities under our Form S-3 filed on February 1, 2022. As a result of the financing events described above, while our liquidity risk continues as a result of continued losses and the ongoing and evolving effects of the COVID-19 pandemic, management believes it has sufficient cash on hand for at least one year following the filing date of this Annual Report on Form 10-K. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the pace at which we can scale Lyte, the expansion of sales and marketing activities and the market acceptance of our products and services. We believe that it is likely we will in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financings, or issue securities related to the effective registration statement described above. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired and/or on acceptable terms, our business, operating results and financial condition could be adversely affected. The following table summarizes our cash flows for the periods presented: Year Ended December 31, Change (in thousands, except percentages) 2021 2020 Amount % Consolidated statement of cash flows Net cash used in operating activities $ (22,514) $ (10,973) $ (11,541) 105.2 % Net cash used in investing activities (46,385) — (46,385) 100.0 % Net cash provided by financing activities 88,019 14,596 73,423 503.0 % Operating Activities Our primary source of cash from operating activities is receipts sales for our various product and service offerings as further described elsewhere in this Annual Report. Our primary uses of cash from operating activities are payments to employees for compensation and related expenses, publishers and other vendors for the purchase of digital media inventory and related costs, vendors for costs of inventory related to the assembly of Lyte computers, sales and marketing expenses and general operating expenses. 58 Table of Contents We utilized $(22.5) million of cash from operating activities during 2021 resulting from a net loss of $(53.5) million. The net loss included non-cash charges of $40.0 million, primarily consisting of the change in fair value of warrants, impairment of digital assets, the loss on the extinguishment and amortization of debt issuance costs related to our 2020 Convertible Notes, as well as stock-based compensation. In addition, certain changes in our operating assets and liabilities resulted in significant cash (decreases) as follows: $(5.7) million from a decrease in accounts payable, accrued expenses and an installment payments to Uber related to the settlement of our lawsuit, as well as $(3.3) million from other working capital changes, primarily related to a decrease in post-acquisition deferred revenue and inventory purchases. We utilized $(11.0) million of cash from operating activities during 2020 primarily resulting from a net loss of $(22.2) million, as adjusted for non-cash charges related to stock-based compensation of $4.5 million, $2.2 million for amortization of debt discount and deferred financing costs, $0.2 million for bad debt expense, $(0.5) million for accounts payable settlements, $(0.9) million for gain on the change in fair value of warrants and $2.2 million for loss on extinguishment of debt. In addition, during 2020 certain changes in our operating assets and liabilities resulted in cash increases (decreases) as follows: $1.5 million from an increase in accounts payable and accrued expenses, $3.0 million accrued legal settlement balance as of December 31, 2020 related to our settlement with Uber, $0.8 million from an decrease in account receivable and $(2.0) million from an decrease in deferred revenue. Investing Activities Investing activities during 2021 consisted of the purchase of digital assets and the acquisition of Lyte Technology, Inc. Financing Activities Our financing activities during 2021 consisted of proceeds from equity financings and debt borrowings offset by payments on debt. We acquired $88.0 million of cash from financing activities resulting primarily from $94.7 million in proceeds from the sale of our common stock, $14.7 million in proceeds from our Series B Convertible Note and 2021 Promissory Note and $4.6 million from a partial exercise of a warrant held by the holder of our 2020 Convertible Notes. These sources of financing were partially offset by $(26.2) million of payments on debt, a majority of which related to payments on the 2020 Convertible Notes. Our financing activities during 2020 consisted of proceeds from various debt borrowings offset by repayments on our various debt offerings and financing factoring agreement. We acquired $14.6 million of cash from financing activities during 2020, as a result of $15.4 million from new issuances of debt (inclusive of $0.6 million from related parties), $9.2 million from our at-the-market offering of common stock and $0.1 million in proceeds from stock option exercises. These sources of financing were partially offset of $(9.0) million of payments on debt (inclusive of $0.6 million to related parties) and $(1.1) million in net repayments on our factoring financing agreement. Contractual Obligations We lease various office facilities, including our corporate headquarters in Texas and offices in California and Florida, under non-cancellable operating lease agreements that expire through 2025. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. Rent expense under operating leases totaled $0.8 million and $0.8 million for the years ended December 31, 2021 and 2020, respectfully. The following table sets forth our contractual obligations as of December 31, 2021 (in thousands): Payments due by period Contractual obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations $ 2,107 $ 667 $ 1,230 $ 210 $ — Off-Balance Sheet Arrangements During the years ended December 31, 2021 and 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities. Indemnification Agreements 59 In the ordinary course of business, we provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, solutions to be provided by the Company or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with directors and certain current and former officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of, or are related to, their status or service as directors, officers or employees. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are set forth below. For further information on all significant accounting policies, refer to Note 2 “ Summary of Significant Accounting Policies ” of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Revenue We derive our revenue primarily from MaaS subscription fees, application development and support fees, as well as revenue from the sale of high-performance personal computer systems. Revenue is recognized when control of these products or services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Our revenue recognition policy follows guidance from Accounting Standards Codification ("ASC") No. 606, Revenue from Contracts with Customers (Topic 606) . We determine revenue recognition through the following five-step framework: • Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract or contracts; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when, or as, we satisfy a performance obligation. Our software subscription and services contracts often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a customer contract consists of licensing, application development and support services, we consider these separate performance obligations, which would require an allocation of consideration. For contracts with multiple performance obligations, the contract price is allocated to separate performance obligations on a relative standalone basis for which significant judgment is required. Judgment is required to determine whether a software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software support and services and recognized over time. Digital Assets We account for out digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other . We have ownership of and control over our digital assets and we may use third-party custodial services to secure them. The digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition. We determine the fair value of our digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement , based on quoted prices on the active exchange(s) that we have determined is the principal market for bitcoin and 60 ethereum (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our digital assets are impaired. In determining if an impairment has occurred, we consider the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within other expense in our consolidated statements of opera Goodwill We review goodwill for impairment annually during the fourth quarter or more frequently if events or changes in circumstances would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. As of December 31, 2021, no impairment of goodwill has been identified. 2020 Convertible Notes and Warrant In July 2020, we issued the 2020 Convertible Notes. We also issued a warrant exercisable for three (3) years for the purchase, initially, of an aggregate of up to 2,160,000 shares of our common stock at an initial exercise price of $4.00 per share. As a result of our underwritten public offering in February 2021, the exercise price of each share decreased to $2.25 per share, and the number of shares for which the warrant is exercisable increased to 3,840,000. We evaluated all of the financial instruments, including the warrant to purchase shares of our common stock issued in conjunction with 2020 Convertible Notes, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815-40, Derivatives and Hedging - Contracts in an Entity’s Own Stock . In accordance with ASC 480, Distinguishing Liabilities from Equity , we accounted for the warrant initially as a liability at its fair value and is then re-valued the warrant at each reporting date, with changes in the fair value reported in the consolidated statement of operations. We used a Black-Scholes option-pricing model to value the warrants at inception and subsequent valuation dates. Furthermore, the holder partially exercised its warrant for 2,060,000 shares of our common stock, in October 2021, which resulted in a revaluation of the warrant at the time of exercise. The initial and subsequent valuations of the warrant requires significant judgment. For the assumptions used to value at warrant as of December 31, 2021, refer to Note 9 “ Debt ” of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Business Combination We account for business combinations using the acquisition method of accounting as prescribed in ASC 805, " Business Combinations (Topic 805)." We record the assets acquired, liabilities assumed and acquisition-related contingent consideration at fair value on the date of acquisition. The difference between the purchase price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill. We may adjust the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as we obtain more information as to facts and circumstances that impact the determination of fair value at the acquisition date. Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition date is recognized in earnings. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. Recent Accounting Standards Recent accounting standards applicable to our business are described under the subheading " Recently Adopted Accounting Policies " in Note 2 " Summary of Significant Accounting Policies " of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, we are not required to provide the information required under this Item. 61